Telstra shareholders back NBN deal

Telstra
’s historic pact with the Gillard government’s national broadband network has given it confidence to maintain its jealously guarded dividend for the next two years, cheering its 1.4 million investors after three years of regulatory uncertainty.

Almost 99.5 per cent of investors voted in favour of the carrier’s $11 billion agreement to plug customers and assets into the project, sparing Telstra the cost of investing in its existing fixed line networks in order to compete with the NBN.

The deal, which needs regulatory approval, delivers a much-needed boost to Labor, whose Communications Minister,
Stephen Conroy
, hailed the vote as “an historic day for telecommunications in Australia".

But at Telstra’s annual meeting in Sydney, a succession of retail shareholders lined up to support chief executive David Thodey (pictured) and lambast the government, saying that it had “blackmailed" the telco into a value-des­tructive deal by “putting a gun to its head" in threatening to deny it access to future mobile phone spectrum.

Chairman
Catherine Livingstone
told those gathered that the deal was the best available and would show any future Coalition government how much compensation Telstra would demand if it was forced into an alternative form of separation.

“This isn’t a decision about whether the NBN is a good idea," she said, to applause. “If we were to compete with NBN Co, we would have all the resulting uncertainty, we couldn’t participate in the digital dividend spectrum auction, we would have a very active competitor in NBN Co and would have none of the cash flows we get from this deal."

Telstra shares rose 2¢ to $3.13 in a falling market as institutional shareholders welcomed news that the board intends to maintain the 28¢ fully franked dividend in 2012 and 2013 and will consider buybacks.

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“Telstra already have free cash flow above the dividend amount and projected profit growth should see full franking sustained. Capital expenditure over the next two years is unlikely to offset this."

Bell Potter Securities telco and media analyst Daniel Blair agreed that the dividend was unlikely to constrain Telstra’s strategy of winning back lost market share, particularly as it would begin getting meaningful cash flows from NBN Co from the 2012-2013 financial year.

“We also estimate Telstra can buy back 4 per cent of its issued shares per year over the next eight to 10 years," he said, noting that Telstra will update the market on its capital management intentions early next year.

Yesterday’s vote marks the biggest turning point yet in Telstra’s history since privatisation and paves the way for the supply and provision of fixed line telecommunications services to be split in Australia for the first time.

Telstra has agreed to hand its fixed line monopoly to NBN Co over the next decade and become a pure retailer of services like its rivals Optus and iiNet, which became the source of takeover speculation yesterday after a competitor, TPG Telecom, took a stake of nearly 5 per cent.

Telstra will be paid to gradually decommission its transfer customers from its decaying copper lines and its cable network to the NBN as the fibre network is rolled out. It will also get rent from NBN Co for the use of its ducts and exchanges and will pass several expensive regulatory obligations to the government.

Investors praised the Telstra board and management, including retiring chief financial officer John Stanhope, for their handling of negotiations with the government over the past two years. The company was forced to the negotiating table by Labor in early 2009 after the government announced plans for a new fixed line monopoly that would connect 93 per cent of Australians to high-speed fibre links, costing up to $43 billion, now up to $35.9 billion.

“I wanted to express the resentment of shareholders at the way this company has been treated," said one shareholder. “It is simply unconscionable. We have had $43 billion of taxpayer money committed to a sheer act of bastardry. “We are taking the vote under duress, shareholder value has been deliberately destroyed and we’ve got to make the best of it. But thank you for the phenomenal job you are doing and helping us to the best we can in a very difficult situation."

Another shareholder said: “I feel sorry for you – this is a democracy, it is not Iraq, it is not Libya, what they [the government] are doing is not something you see in a democracy."

Ms Livingstone responsed that Telstra had to deal with “the policy of the day". She said there had been many questions about whether the NBN deal would result in a “windfall gain for management remuneration". “The very clear answer is no," she said.

She also played down any prospect that the Australian Competition and Consumer Commission would en­force changes to Telstra’s structural separation undertaking, which is directly linked to the deal, that would prove material. “In the event that there were a material change we would come back to shareholders for another vote," she stressed.

Some shareholders queried whether John Mullen, who is chief executive of Asciano, could perform his full duties as a Telstra director. Ms Livingstone said the board had given Mr Mullen its full backing. Three per cent of share­holders voted against his re-election.

Ms Livingstone noted that the shares had outperformed the market by 25 per cent over the past 12 months value amid the recent market turmoil.

However, the shares are still below the $3.50 mark they traded before Telstra was ejected from Labor’s original NBN plans in late 2008, the news which sparked the row that ultimately led to yesterday’s deal.